Japan's Nuclear Future is an Energy Market Wild Card

After dealing with the impact of the decision to close all of its nuclear power plants, Japan looks like it's ready to turn some back on.

After the Fukushima disaster, Japan mothballed all of its nuclear power plants. That decision has had major implications for the country's economy. Now it's reconsidering that decision, which has uranium miners like Cameco(NYSE:CCJ) waiting to see how and when Japan chooses to reenter the nuclear age.

Here today, gone tomorrowThe Fukushima nuclear meltdown was a perfect storm: An earthquake leads to a tsunami that leads to a nuclear meltdown. Japan's reaction was to shut its nuclear fleet. Not a bad call at the time, but losing an important source of electricity virtually overnight had big implications.

(Source: Steve Herman, via Wikimedia Commons)

Toshikazu Okuya, an official in the Japanese Ministry of Economy, Trade, and Industry, recently told NPR that electricity bills in his country have gone up 20% since the nuclear shut down. That's largely because Japan now has to import nearly 90% of the fossil fuels it burns for power generation. "The increased cost of importing fuels has had a big, negative impact on our balance of trade," according to Okuya.

Companies have been happy to provide the additional carbon-based fuel. For example, Cloud Peak Energy(NYSE:CLD) has been sending test coal to Japan in an effort to gain a new regional customer. Cloud Peak already has a major presence in South Korea and is pinning its growth plans on increased exports, which today are only a small fraction of its overall coal sales.

In fact, during Peabody Energy's(NYSE:BTU) fourth quarter conference call, CEO Gregory Boyce noted Japan's efforts to build new coal power plants as one of last year's most positive events in the coal sector. Peabody, which has operations in Australia, can serve Japan's coal needs today, something that Cloud Peak can't do. Cloud Peak CEO Colin Marshall pointed out his company's problem during the fourth quarter call, "The [Japanese] test runs went well and could turn into long-term contracts when West Coast terminal capacity is built." That's mixed news, at best.

Bringing it backCoal, however, is the cheap stuff. The big hurt for Japan is importing more natural gas and oil. For example, natural gas is cheap in the United States but much more expensive around the world. Japan's liquified natural gas imports only rose about 0.2% in 2013, but the cost of those imports rose a whopping 17.5%. Thermal coal imports, for comparison, were up 1.3% and the total cost was only up 2%. So Peabody and Cloud Peak will probably see continued Japanese demand for coal even as increased costs have led the country to reconsider its nuclear future.

(Source: Ondrejk, via Wikimedia Commons)

A nuclear restart is a tough political call for Japan, where nuclear power is a sensitive issue. Interestingly, Japan is just as sensitive an issue among uranium miners like Cameco and Rio Tinto (NYSE:RIO). Cameco CFO Grant Isaac recently noted at a conference that the, "events in Japan [have] created a very thick fog that... makes it difficult to navigate." The Japanese situation appears to be a key factor behind sluggish uranium demand from other buyers.

That's fine for the buyers in the near-term, but could lead to demand outstripping supply longer term. That's particularly true if Japan comes back into the market, an event that could prove to be a key tipping point. Note, too, that uranium supply is set to tighten up as secondary market supplies dry up. Most notable, the agreement between Russia and the United States to convert Russian nuclear warheads to fuel grade uranium ended last year.

Wait for it...The intentions of the Japanese government are pretty clear, it wants to restart some nuclear plants. Keep an eye on its progress. The country has plenty of nuclear fuel on hand, so it won't be jumping back into the market right away. However, a restart might just push other buyers to act. Add in the drop in secondary market supplies and uranium prices could start to move higher. That would be music to the ears of Cameco and its shareholders.

Japan's energy troubles, though, show that carbon fuels are still key...